What changed in this filing

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Item 1. Financial Statements

2022-05-10 compared with 2022-02-08 · 195 added, 96 removed, 678 unchanged (30% of the section changed)

36 unchanged sentences

Class A common stock, $ 0.001 par value;

1,000,000,000 shares authorized, 127,236,783 and 122,414,827 shares issued and outstanding as of December 31, 2021 and September 30, 2021, respectively

1,000,000,000 shares authorized, 137,198,372 and 122,414,827 shares issued and outstanding as of March 31, 2022 and September 30, 2021, respectively

Class B common stock, $ 0.001 par value;

1,000,000,000 shares authorized, 387,300,086 and 391,970,996 issued and outstanding as of December 31, 2021 and September 30, 2021, respectively

1,000,000,000 shares authorized, 377,650,449 and 391,970,996 issued and outstanding as of March 31, 2022 and September 30, 2021, respectively

Additional paid-in capital 1,971 1,942

10 unchanged sentences

Three Months Ended

March 31, Six Months Ended

2022 2021 2022 2021

(in millions, except share and per share data)

7 unchanged sentences

Interest expense, net ( 32 ) ( 32 ) ( 62 ) ( 63 )

Other income (expense) 54 ( 31 )

Other (expense) income ( 8 ) 49 46 18

Income before income taxes 126 168 389 302

3 unchanged sentences

Net income attributable to Warner Music Group Corp.

$ 92 $ 117 $ 279 $ 215

Net income per share attributable to common stockholders:

10 unchanged sentences

Three Months Ended

March 31, Six Months Ended

2022 2021 2022 2021

(in millions)

7 unchanged sentences

Comprehensive income attributable to Warner Music Group Corp.

$ 81 $ 93 $ 250 $ 228

See accompanying notes

1 unchanged sentence

Consolidated Statements of Cash Flows (Unaudited)

Three Months Ended

Six Months Ended

(in millions)

5 unchanged sentences

Deferred income taxes 30 14

Net gain on divestitures and investments ( 11 ) ( 14 )

Net loss (gain) on divestitures and investments 28 ( 32 )

Non-cash interest expense 3 2

15 unchanged sentences

Investments and acquisitions of businesses, net of cash received ( 429 ) ( 39 )

Proceeds from the sale of investments 11 —

Net cash used in investing activities ( 649 ) ( 404 )

6 unchanged sentences

Cash paid to settle contingent consideration ( 4 ) —

Taxes paid related to net share settlement of restricted stock units ( 6 ) —

Net cash provided by financing activities 363 114

6 unchanged sentences

Consolidated Statements of Equity (Unaudited)

Three Months Ended December 31, 2021

Six Months Ended March 31, 2022

Common Stock Class B

4 unchanged sentences

Equity Non-controlling

Interest Total

Interest Total Equity

Shares Value Shares Value

3 unchanged sentences

Other comprehensive loss, net of tax — — — — — — ( 29 ) ( 29 ) — ( 29 )

Dividends ($ 0.15 per Class A and B share)

Dividends ($ 0.30 per share)

— — — — — ( 156 ) — ( 156 ) — ( 156 )

1 unchanged sentence

Distribution to noncontrolling interest holders — — — — — — — — ( 1 ) ( 1 )

Conversion of Class B shares for Class A shares 4,670,910 — ( 4,670,910 ) — — — — — — —

Vesting of restricted stock units, net of shares withheld for employee taxes 276,565 — — — ( 6 ) — — ( 6 ) — ( 6 )

Conversion of Class B shares to Class A shares 14,320,547 — ( 14,320,547 ) — — — — — — —

Shares issued under Omnibus Incentive Plan 186,433 — — — — — — — — —

Other — — — — — — — — 4 4

Balance at March 31, 2022 137,198,372 $ — 377,650,449 $ 1 $ 1,971 $ ( 1,587 ) $ ( 231 ) $ 154 $ 19 $ 173

Three Months Ended March 31, 2022

Common Stock Class B

Common Stock Additional

Capital Accumulated

Deficit Accumulated

Comprehensive

Equity Non-controlling

Interest Total Equity

Shares Value Shares Value

(in millions, except share and per share data)

Balance at December 31, 2021 127,236,783 $ — 387,300,086 $ 1 $ 1,973 $ ( 1,601 ) $ ( 220 ) $ 153 $ 19 $ 172

Three Months Ended December 31, 2020

Net income — — — — — 92 — 92 — 92

Other comprehensive loss, net of tax — — — — — — ( 11 ) ( 11 ) — ( 11 )

Dividends ($ 0.15 per share)

— — — — — ( 78 ) — ( 78 ) — ( 78 )

Stock-based compensation expense — — — — 4 — — 4 — 4

Vesting of restricted stock units, net of shares withheld for employee taxes 276,565 — — — ( 6 ) — — ( 6 ) — ( 6 )

Conversion of Class B Shares to Class A shares 9,649,637 — ( 9,649,637 ) — — — — — — —

Shares issued under Omnibus Incentive Plan 35,387 — — — — — — — — —

Balance at March 31, 2022 137,198,372 $ — 377,650,449 $ 1 $ 1,971 $ ( 1,587 ) $ ( 231 ) $ 154 $ 19 $ 173

Six Months Ended March 31, 2021

Common Stock Class B

3 unchanged sentences

Comprehensive

(Deficit) Non-controlling

Interest Total

Equity (Deficit) Non-controlling

Interest Total Equity (Deficit)

Shares Value Shares Value

3 unchanged sentences

Other comprehensive income, net of tax — — — — — — 13 13 — 13

Dividends ($ 0.12 per Class A and B share)

Dividends ($ 0.24 per share)

— — — — — ( 125 ) — ( 125 ) — ( 125 )

3 unchanged sentences

Shares issued under the Plan 4,321,259 — — — — — — — — —

Conversion of Class B shares 4,754,626 — ( 4,754,626 ) — — — — — — —

Shares issued under Omnibus Incentive Plan 33,062 — — — — — — — — —

Balance at March 31, 2021 116,921,411 $ — 397,461,268 $ 1 $ 1,924 $ ( 1,659 ) $ ( 209 ) $ 57 $ 16 $ 73

Three Months Ended March 31, 2021

Common Stock Class B

Common Stock Additional

Capital Accumulated

Deficit Accumulated

Comprehensive

Equity Non-controlling

Interest Total Equity

Shares Value Shares Value

(in millions, except share and per share data)

Balance at December 31, 2020 111,167,356 $ — 403,184,814 $ 1 $ 1,913 $ ( 1,713 ) $ ( 185 ) $ 16 $ 17 $ 33

Net income — — — — — 117 — 117 — 117

Other comprehensive loss, net of tax — — — — — — ( 24 ) ( 24 ) — ( 24 )

Dividends ($ 0.12 per share)

— — — — — ( 63 ) — ( 63 ) — ( 63 )

Stock-based compensation expense — — — — 11 — — 11 — 11

Distribution to noncontrolling interest holders — — — — — — — — ( 1 ) ( 1 )

Exchange of Class B shares for Class A shares 968,920 — ( 968,920 ) — — — — — — —

Conversion of Class B shares 4,754,626 — ( 4,754,626 ) — — — — — — —

Shares issued under Omnibus Incentive Plan 30,509 — — — — — — — — —

Balance at March 31, 2021 116,921,411 $ — 397,461,268 $ 1 $ 1,924 $ ( 1,659 ) $ ( 209 ) $ 57 $ 16 $ 73

See accompanying notes

12 unchanged sentences

The Company listed these shares on the NASDAQ stock market under the ticker symbol “WMG.” The offering consisted entirely of secondary shares sold by Access Industries, LLC (collectively with its affiliates, “Access”) and certain related selling stockholders.

Access and its affiliates continue to hold all of the Class B common stock of the Company, par value $ 0.001 per share (“Class B Common Stock”), representing approximately 98 % of the total combined voting power of the Company’s outstanding common stock and approximately 75 % of the economic interest as of December 31, 2021.

Access continues to hold all of the Class B common stock of the Company, par value $ 0.001 per share (“Class B Common Stock”), representing approximately 98 % of the total combined voting power of the Company’s outstanding common stock and approximately 73 % of the economic interest as of March 31, 2022.

As a result, the Company is a “controlled company” within the meaning of the corporate governance standards of NASDAQ.

12 unchanged sentences

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

Operating results for the three months ended December 31, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2022.

Operating results for the three and six months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2022.

The consolidated balance sheet at September 30, 2021 has been derived from the audited consolidated financial statements at that date but does not include all the information and notes required by U.S.

9 unchanged sentences

The fiscal year ended September 30, 2022 includes 53 weeks, and the fiscal year ended September 30, 2021 included 52 weeks.

The additional week in fiscal year 2022 falls in the fiscal quarter ended December 31, 2021.

Accordingly, the results of operations for the three months ended December 31, 2021 reflect 14 weeks compared to 13 weeks for the three months ended December 31, 2020.

All references to December 31, 2021 and December 31, 2020 relate to the periods ended December 31, 2021 and December 25, 2020, respectively.

For convenience purposes, the Company continues to date its first-quarter financial statements as of December 31.

The additional week in fiscal year 2022 fell in the fiscal quarter ended December 31, 2021.

Accordingly, the results of operations for the six months ended March 31, 2022 reflect 27 weeks compared to 26 weeks for the six months ended March 31, 2021.

All references to March 31, 2022 and March 31, 2021 relate to the periods ended April 1, 2022 and March 26, 2021, respectively, and both periods include 13 weeks.

For convenience purposes, the Company continues to date its second-quarter financial statements as of March 31.

The fiscal year ended September 30, 2021 ended on September 24, 2021.

6 unchanged sentences

The aggregate number of shares of common stock available for issuance under the Omnibus Incentive Plan is 31,169,099 shares of Class A Common Stock over the 10-year period from the date of adoption, including up to 1,000,000 shares of our Class A Common Stock in connection with the IPO.

Since the IPO, a total of 215,613 shares of Class A Common Stock have been issued under the Omnibus Incentive Plan, which includes 151,046 and 2,553 shares issued during the three months ended December 31, 2021, and 2020, respectively.

During the three months ended December 31, 2021, an aggregate of 4,670,910 shares of Class B Common Stock were converted to Class A Common Stock.

Since the IPO, a total of 527,565 shares of Class A Common Stock have been issued under the Omnibus Incentive Plan.

During the three and six months ended March 31, 2022, 311,952 and 462,998 shares, respectively, were issued, both of which include common shares issued in connection with the vesting of RSUs in January 2022 as described below.

During the three and six months ended March 31, 2021, 30,509 and 33,062 shares, respectively, were issued.

During the three months ended March 31, 2022, the Company satisfied the vesting of RSUs issued to employees in fiscal 2021 in connection with the IPO by issuing 276,565 shares of Class A Common Stock under the Omnibus Incentive Plan, which is net of shares used to settle employee income tax obligations.

During the six months ended March 31, 2022, an aggregate of 14,320,547 shares of Class B Common Stock were converted to Class A Common Stock.

In connection with the Senior Management Free Cash Flow Plan (the “Plan”), a remaining Plan participant redeemed a portion of vested Class B equity units of the LLC holding company, WMG Management Holdings, LLC (“Management LLC”).

These Class B equity units were redeemed in exchange for a total of 510,165 shares of Class B Common Stock, which shares of Class B Common Stock converted to shares of Class A Common Stock upon the exchange.

Additionally, during the three months ended December 31, 2021, Access converted 4,160,745 shares of Class B Common Stock to the same number of shares of Class A Common Stock, which it subsequently sold through open market sales, which is reflected as an exchange of Class B Common Stock in the consolidated statements of equity for the three months ended December 31, 2021.

Additionally, during the six months ended March 31, 2022, Access converted 13,810,382 shares of Class B Common Stock to the same number of shares of Class A Common Stock, which is reflected as a conversion of Class B Common Stock in the consolidated statements of equity for the six months ended March 31, 2022.

Earnings per Share

2 unchanged sentences

The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock according to dividends declared and participation rights in undistributed earnings.

Undistributed earnings allocated to participating securities are subtracted from net income in determining net income attributable to common stockholders.

Undistributed

earnings allocated to participating securities are subtracted from net income in determining net income attributable to common stockholders.

Stock-Based Compensation

4 unchanged sentences

The Company accounts for forfeitures as they occur.

Stock-based compensation is recognized on a straight-line basis over the requisite service period, which is generally four years except for certain one-year awards issued in connection with the IPO.

Stock-based compensation is recognized on a straight-line basis over the requisite service period, which is generally four years except for certain one-year awards issued in connection with the IPO, which vested in January 2022.

The Company also grants unvested restricted stock to the Company’s directors.

2 unchanged sentences

The awards outstanding under the Plan are equity-classified.

The Company recognized approximately $ 24 million of non-cash stock-based compensation expense for the three months ended December 31, 2021, of which $ 22 million was recorded to additional paid-in capital, and a remaining $ 2 million has been classified as a share-based compensation liability as of December 31, 2021.

The Company recognized approximately $ 6 million and $ 30 million of non-cash stock-based compensation expense for the three and six months ended March 31, 2022, respectively, of which $ 4 million and $ 26 million was recorded to additional paid-in capital, and a remaining $ 4 million has been classified as a share-based compensation liability as of March 31, 2022.

The share-based compensation liability represents executive awards that have not yet been granted under the Omnibus Incentive Plan, where a total value is known and settlement will occur in a variable number of RSUs.

During the three months ended December 31, 2021, $ 9 million was reclassified from share-based compensation liability to additional paid-in capital, representing the grant date fair value of RSUs granted which were previously classified as a share-based compensation liability as of September 30, 2021.

The Company recognized approximately $ 6 million of non-cash stock-based compensation expense for the three months ended December 31, 2020.

During the three and six months ended March 31, 2022, $ 9 million was reclassified from share-based compensation liability to additional paid-in capital, representing the grant date fair value of RSUs granted which were previously classified as a share-based compensation liability as of September 30, 2021.

The Company recognized approximately $ 15 million and $ 21 million of non-cash stock-based compensation expense for the three and six months ended March 31, 2021, respectively.

The Company uses the estimated annual effective tax rate method in computing its interim tax provision.

19 unchanged sentences

The Company adopted ASU 2020-06 in the first quarter of fiscal year 2022 and this adoption did not have any impact on the Company’s consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”).

The amendment provides optional expedients and exceptions for applying U.S.

GAAP to contracts, hedging relationships and other transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”) or by another reference rate expected to be discontinued because of reference rate reform, if certain criteria are met.

In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848):

Scope , which clarified that certain optional expedients and exceptions in Topic 848 apply to derivative instruments that are affected by the discounting transition due to reference rate reform.

These ASUs were effective upon issuance and may be applied prospectively to contract modifications and hedging relationships entered into or evaluated through December 31, 2022.

The discontinuation of LIBOR will impact the Senior Term Loan Facility and Revolving Credit Facility as well as a pay-fixed receive-variable interest rate swap which will be outstanding as of the effective date of the discontinuation.

The Company is in the process of evaluating the effect that the adoption of these standards will have on its consolidated financial statements, but does not expect it will have a material effect.

Earnings per Share

3 unchanged sentences

Under the treasury-stock method, potential common shares are excluded from the computation of EPS in periods in which they have an anti-dilutive effect.

The potentially dilutive common shares did not have a dilutive effect on the Company’s EPS calculation for the three months ended December 31, 2021 and 2020, respectively.

The potentially dilutive common shares did not have a dilutive effect on the Company’s EPS calculation for the three and six months ended March 31, 2022 and 2021, respectively.

The Company allocates dividends declared to Class A Common Stock and Class B Common Stock based on timing and amounts actually declared for each class of stock and the undistributed earnings are allocated to Class A Common Stock and Class B Common Stock pro rata on a basic weighted average shares outstanding basis since the two classes of stock participate equally on a per share basis upon liquidation.

3 unchanged sentences

Refer to Note 2 for a description of current period activity.

The following table sets forth the calculation of basic and diluted net income per common share under the two-class method for the three months ended December 31, 2021 and 2020 (in millions, except share and per share data):

Three Months Ended December 31,

The following table sets forth the calculation of basic and diluted net income per common share under the two-class method for the three and six months ended March 31, 2022 and 2021 (in millions, except share and per share data):

Three Months Ended March 31,

Class A Class B Class A Class B

6 unchanged sentences

Basic and Diluted EPS $ 0.18 $ 0.18 $ 0.23 $ 0.22

Six Months Ended March 31,

Class A Class B Class A Class B

Basic and Diluted EPS:

Net income attributable to Warner Music Group Corp.

$ 73 $ 206 $ 46 $ 169

Net income attributable to participating securities ( 4 ) — ( 3 ) —

Net income attributable to common stockholders $ 69 $ 206 $ 43 $ 169

Weighted average shares outstanding 130,159,145 384,441,906 103,922,919 408,669,332

Basic and Diluted EPS $ 0.53 $ 0.53 $ 0.41 $ 0.41

Revenue Recognition

8 unchanged sentences

Three Months Ended

March 31, Six Months Ended

2022 2021 2022 2021

(in millions)

10 unchanged sentences

Synchronization 50 38 92 71

Other 4 3 6 5

Total Music Publishing 230 192 459 367

4 unchanged sentences

Music Publishing 117 96 232 187

635 565 1,358 1,137

International Recorded Music 629 590 1,407 1,270

59 unchanged sentences

Based on this information, management provides a reserve for estimated credit losses.

Based on management’s analysis of sales returns, refund liabilities of $ 33 million and $ 23 million were established at December 31, 2021 and September 30, 2021, respectively.

Based on management’s analysis of estimated credit losses, reserves of $ 20 million and $ 20 million were established at December 31, 2021 and September 30, 2021, respectively.

Based on management’s analysis of sales returns, refund liabilities of $ 22 million and $ 23 million were established at March 31, 2022 and September 30, 2021, respectively.

Based on management’s analysis of estimated credit losses, reserves of $ 22 million and $ 20 million were established at March 31, 2022 and September 30, 2021, respectively.

Principal versus Agent Revenue Recognition

9 unchanged sentences

Reductions in deferred revenue are a result of the Company’s performance under the contract or usage by the licensee.

Deferred revenue increased by $ 104 million during the three months ended December 31, 2021 related to cash received from customers for fixed fees and minimum guarantees in advance of performance, including amounts recognized in the period.

Revenues of $ 135 million were recognized during the three months ended December 31, 2021 related to the balance of deferred revenue at September 30, 2021.

Deferred revenue increased by $ 201 million during the six months ended March 31, 2022 related to cash received from customers for fixed fees and minimum guarantees in advance of performance, including amounts recognized in the period.

Revenues of $ 207 million were recognized during the six months ended March 31, 2022 related to the balance of deferred revenue at September 30, 2021.

There were no other significant changes to deferred revenue during the reporting period.

Performance Obligations

For the three months ended December 31, 2021 and December 31, 2020, the Company recognized revenue of $ 37 million and $ 20 million, respectively, from performance obligations satisfied in previous periods.

For the six months ended March 31, 2022 and March 31, 2021, the Company recognized revenue of $ 43 million and $ 34 million, respectively, from performance obligations satisfied in previous periods.

Wholly and partially unsatisfied performance obligations represent future revenues not yet recorded under long-term intellectual property licensing contracts containing fixed fees, advances and minimum guarantees.

Revenues expected to be recognized in the future related to performance obligations that are unsatisfied at December 31, 2021 are as follows:

Revenues expected to be recognized in the future related to performance obligations that are unsatisfied at March 31, 2022 are as follows:

Rest of FY22 FY23 FY24 Thereafter Total

21 unchanged sentences

Property, plant and equipment, net 1

Operating lease right-of-use assets, net 3

Intangible assets subject to amortization, net (a) 258

3 unchanged sentences

Accrued liabilities ( 1 )

Operating lease liabilities, noncurrent ( 3 )

Total purchase price allocated $ 397

6 unchanged sentences

Total intangible assets acquired $ 258

At March 31, 2022, the Company updated the preliminary allocation recorded at December 31, 2021 based on revised estimates of fair value, which resulted in an increase to intangible assets and a net decrease to other acquired assets and liabilities, with a corresponding decrease to goodwill.

The acquisition accounting is subject to revision based on final determinations of fair value and allocations of purchase price to the identifiable assets and liabilities acquired, in addition to the determination of the final consideration, including the determination of the final working capital adjustment pursuant to the mechanism set forth in the Merger Agreement.

During the three months ended December 31, 2021, the Company incurred costs related to this acquisition of approximately $ 3 million, which were expensed as incurred and recorded in selling, general and administrative expenses in the accompanying consolidated statement of operations.

For both the three and six months ended March 31, 2022, the Company incurred costs related to this acquisition of approximately $ 3 million, which were expensed as incurred and recorded in selling, general and administrative expenses in the accompanying consolidated statement of operations.

Prior to the acquisition, the Company had a distribution arrangement with 300 Entertainment.

The unaudited pro forma revenue and operating income as if the acquisition occurred on October 1, 2020 is not material to the Company’s reported results for three months ended December 31, 2021 and December 31, 2020.

The unaudited pro forma revenue and operating income as if the acquisition occurred on October 1, 2020 is not material to the Company’s reported results for the three and six months ended March 31, 2022 and March 31, 2021.

Comprehensive Income

7 unchanged sentences

Other comprehensive (loss) income ( 50 ) — 21 ( 29 )

Balances at December 31, 2021 $ ( 199 ) $ ( 11 ) $ ( 10 ) $ ( 220 )

Balances at March 31, 2022 $ ( 224 ) $ ( 11 ) $ 4 $ ( 231 )

______________________________________

27 unchanged sentences

The landlord for both leases is an affiliate of Access.

As of December 31, 2021, the aggregate lease liability related to these leases was $ 121 million.

As of March 31, 2022, the aggregate lease liability related to these leases was $ 118 million.

There are no restrictions or covenants, such as those relating to dividends or incurring additional financial obligations, relating to our lease portfolio, and residual value guarantees are not significant.

The components of lease expense were as follows:

Three Months Ended December 31,

Three Months Ended March 31, Six Months Ended March 31,

2022 2021 2022 2021

(in millions)

3 unchanged sentences

Total lease cost $ 16 $ 17 $ 33 $ 34

The Company incurred and recorded other occupancy expenses of $ 4 million for both the three months ended December 31, 2021 and December 31, 2020.

The Company incurred and recorded other occupancy expenses of $ 8 million and $ 12 million for the three and six months ended March 31, 2022, respectively, and $ 4 million and $ 8 million for the three and six months ended March 31, 2021, respectively.

Supplemental cash flow information related to leases was as follows:

Three Months Ended December 31,

Six Months Ended March 31,

(in millions)

19 unchanged sentences

Imputed interest ( 56 )

As of December 31, 2021, there have been no leases entered into that have not yet commenced.

As of March 31, 2022, there have been no leases entered into that have not yet commenced.

Goodwill and Intangible Assets

5 unchanged sentences

Other adjustments (b) ( 23 ) — ( 23 )

Balances at December 31, 2021 $ 1,481 $ 464 $ 1,945

Balances at March 31, 2022 $ 1,458 $ 464 $ 1,922

______________________________________

(a) Primarily relates to the acquisition of 300 Entertainment as described in Note 5.

(b) Other adjustments during the three months ended December 31, 2021 represent foreign currency movements.

(b) Other adjustments during the six months ended March 31, 2022 represent foreign currency movements.

The Company performs its annual goodwill impairment test in accordance with ASC 350, Intangibles—Goodwill and Other (“ASC 350”) during the fourth quarter of each fiscal year as of July 1.

3 unchanged sentences

Intangible assets consist of the following:

Weighted-Average Useful Life December 31,

Weighted-Average Useful Life March 31,

2022 September 30,

12 unchanged sentences

Total net intangible assets $ 2,563 $ 2,171

The increase in intangible assets during the three months ended December 31, 2021 primarily relates to the acquisition of 300 Entertainment, which resulted in an increase in intangible assets as described in Note 5, and an acquisition of music-related assets within music publishing copyrights for approximately $ 250 million.

The increase in intangible assets during the six months ended March 31, 2022 primarily relates to the acquisition of 300 Entertainment, which resulted in an increase in intangible assets as described in Note 5, and an acquisition of music-related assets within music publishing copyrights for approximately $ 250 million.

Debt Capitalization

13 unchanged sentences

______________________________________

(a) Reflects $ 300 million of commitments under the Revolving Credit Facility, less letters of credit outstanding of approximately $ 7 million at both December 31, 2021 and September 30, 2021.

There were no loans outstanding under the Revolving Credit Facility at December 31, 2021 or September 30, 2021.

(a) Reflects $ 300 million of commitments under the Revolving Credit Facility, less letters of credit outstanding of approximately $ 7 million at both March 31, 2022 and September 30, 2021.

There were no loans outstanding under the Revolving Credit Facility at March 31, 2022 or September 30, 2021.

The Company is the direct parent of Holdings, which is the direct parent of Acquisition Corp.

As of December 31, 2021 Acquisition Corp.

As of March 31, 2022 Acquisition Corp.

had issued and outstanding the 2.750 % Senior Secured Notes due 2028, the 3.750 % Senior Secured Notes due 2029, the 3.875 % Senior Secured Notes due 2030, the 2.250 % Senior Secured Notes due 2031 and the 3.000 % Senior Secured Notes due 2031 (together, the “Acquisition Corp.

7 unchanged sentences

and its subsidiaries are not currently restricted from distributing funds to the Company and Holdings under the indentures for the Acquisition Corp.

Notes, as well as the credit agreements for the Acquisition Corp.

Notes or the credit agreements for the Acquisition Corp.

Senior Credit Facilities, including the Revolving Credit Facility and the Senior Term Loan Facility, should Acquisition Corp.’s Total Indebtedness to EBITDA Ratio increase above 3.50 :1.00 and the term loans not achieve an investment grade rating, the covenants under the Revolving Credit Facility will be reinstated and the ability of the Company and Holdings to obtain funds from their subsidiaries will be restricted by the Revolving Credit Facility.

10 unchanged sentences

provided that, in respect of 2020 Revolving Loans, the applicable margin with respect to such loans is subject to adjustment as set forth in the pricing grid in the Revolving Credit Agreement.

Based on the Senior Secured Indebtedness to EBITDA Ratio of 3.08 x at December 31, 2021, the applicable margin for Eurodollar loans would be 1.625 % instead of 1.875 % and the applicable margin for ABR loans would be 0.625 % instead of 0.875 % in the case of 2020 Revolving Loans.

Based on the Senior Secured Indebtedness to EBITDA Ratio of 3.06 x at March 31, 2022, the applicable margin for Eurodollar loans would be 1.625 % instead of 1.875 % and the applicable margin for ABR loans would be 0.625 % instead of 0.875 % in the case of 2020 Revolving Loans.

If there is a payment default at any time, then the interest rate applicable to overdue principal will be the rate otherwise applicable to such loan plus 2.0 % per annum.

11 unchanged sentences

Maturities of Senior Secured Notes

As of December 31, 2021, there are no scheduled maturities of notes until 2028, when $ 368 million is scheduled to mature.

As of March 31, 2022, there are no scheduled maturities of notes until 2028, when $ 360 million is scheduled to mature.

Thereafter, $ 2.368 billion is scheduled to mature.

Interest Expense, net

Total interest expense, net was $ 30 million and $ 31 million for the three months ended December 31, 2021 and 2020, respectively.

The weighted-average interest rate of the Company’s total debt was 3.2 % at December 31, 2021, 3.2 % at September 30, 2021 and 3.7 % at December 31, 2020.

Total interest expense, net was $ 32 million and $ 32 million for the three months ended March 31, 2022 and 2021, respectively, and $ 62 million and $ 63 million for the six months ended March 31, 2022 and 2021, respectively.

The weighted-average interest rate of the Company’s total debt was 3.3 % at March 31, 2022, 3.2 % at September 30, 2021 and 3.7 % at March 31, 2021.

Commitments and Contingencies

4 unchanged sentences

Any claims or proceedings against the Company, whether meritorious or not, can have an adverse impact because of defense costs, diversion of management and operational resources, negative publicity and other factors.

For the three months ended December 31, 2021, the Company recorded an income tax expense of $ 75 million.

The income tax expense for the three months ended December 31, 2021 is higher than the expected tax expense at the statutory tax rate of 21% primarily due to U.S.

For the three and six months ended March 31, 2022, the Company recorded an income tax expense of $ 34 million and $ 109 million.

The income tax expense for the three and six months ended March 31, 2022 is higher than the expected tax expense at the statutory rate of 21% primarily due to U.S.

state and local taxes, withholding taxes, foreign income taxed at rates higher than the U.S., and non-deductible executive compensation under IRC Section 162(m), offset by a deduction against foreign derived intangible income (“FDII”).

For the three months ended December 31, 2020, the Company recorded an income tax expense of $ 35 million.

The income tax expense for the three months ended December 31, 2020 is higher than the expected tax benefit at the statutory tax rate of 21% primarily due to U.S.

state and local taxes, withholding taxes, foreign income taxed at rates higher than the U.S., and non-deductible executive compensation under IRC Section 162(m), offset by FDII and excess tax benefits from long term incentive plan.

The Company has determined that it is reasonably possible that the gross unrecognized tax benefits as of December 31, 2021 could decrease by up to approximately $ 2 million related to various ongoing audits and settlement discussions in various foreign jurisdictions during the next twelve months.

For the three and six months ended March 31, 2021, the Company recorded an income tax expense of $ 51 million and $ 86 million, respectively.

The income tax expense for the three months ended March 31, 2021 is higher than the expected tax benefit at the statutory tax rate of 21% primarily due to U.S.

state and local taxes, foreign income taxes at rates higher than the U.S., and non-deductible executive compensation under IRC Section 162(m), offset, by FDII.

The income tax expense for the six months ended March 31, 2021 is higher than the expected tax expense at the statutory tax rate of 21% primarily due to U.S.

state and local taxes, foreign income taxes at rates higher than the U.S., and non-deductible executive compensation under IRC Section 162(m), offset by FDII and excess tax benefits from the Company’s long term incentive plan.

The Company has determined that it is reasonably possible that the gross unrecognized tax benefits as of March 31, 2022 could decrease by up to approximately $ 2 million related to various ongoing audits and settlement discussions in various foreign jurisdictions during the next twelve months.

Derivative Financial Instruments

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The interest rate swap instruments are designated and qualify as cash flow hedges under the criteria prescribed in ASC 815.

records these contracts at fair value on its balance sheet and gains or losses on these contracts are deferred in equity (as a component of comprehensive income).

The Company records these contracts at fair value on its balance sheet and gains or losses on these contracts are deferred in equity (as a component of comprehensive income).

The fair value of foreign currency forward exchange contracts is determined by using observable market transactions of spot and forward rates (i.e., Level 2 inputs) which is discussed further in Note 15.

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As a result, net assets or liabilities resulting from foreign exchange derivatives subject to these netting agreements are classified within other current assets or other current liabilities in the Company’s consolidated balance sheets.

The Company’s hedged interest rate transactions as of December 31, 2021 are expected to be recognized within two years .

The Company’s hedged interest rate transactions as of March 31, 2022 are expected to be recognized within two years .

The fair value of interest rate swaps is based on dealer quotes of market rates (i.e., Level 2 inputs) which is discussed further in Note 15.

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The Company monitors its positions with, and the credit quality of, the financial institutions that are party to any of its financial transactions.

As of December 31, 2021, the Company had outstanding hedge contracts for the sale of $ 317 million and the purchase of $ 218 million of foreign currencies at fixed rates that will be settled by September 2022.

As of December 31, 2021, the Company had outstanding $ 820 million in pay-fixed receive-variable interest rate swaps with $ 10 million of unrealized deferred losses in comprehensive income related to the interest rate swaps.

As of March 31, 2022, the Company had outstanding hedge contracts for the sale of $ 287 million and the purchase of $ 204 million of foreign currencies at fixed rates that will be settled by September 2022.

As of March 31, 2022, the Company had outstanding $ 820 million in pay-fixed receive-variable interest rate swaps with $ 4 million of unrealized deferred gains in comprehensive income related to the interest rate swaps.

As of September 30, 2021, the Company had outstanding $ 820 million in pay-fixed receive-variable interest rate swaps with $ 17 million of unrealized deferred losses in comprehensive income related to the interest rate swaps.

The Company recorded realized pre-tax gains of $ 1 million and unrealized pre-tax gains of $ 2 million related to its foreign currency forward exchange contracts in the consolidated statement of operations as other income for the three months ended December 31, 2021.

The Company recorded realized pre-tax losses of $ 1 million and unrealized pre-tax losses of $ 4 million related to its foreign currency forward exchange contracts in the consolidated statement of operations as other expense for the three months ended December 31, 2020.

The unrealized pre-tax gains of the Company’s derivative interest rate swaps designated as cash flow hedges recorded in other comprehensive income during the three months ended December 31, 2021 were $ 9 million.

The following is a summary of amounts recorded in the consolidated balance sheets pertaining to the Company’s derivative instruments at December 31, 2021 and September 30, 2021:

The Company recorded realized pre-tax gains of $ 3 million and unrealized pre-tax gains of $ 2 million related to its foreign currency forward exchange contracts in the consolidated statement of operations as other income for the six months ended March 31, 2022.

The Company recorded realized pre-tax losses of $ 2 million and no unrealized pre-tax gains or losses related to its foreign currency forward exchange contracts in the consolidated statement of operations as other expense for the six months ended March 31, 2021.

The unrealized pre-tax gains of the Company’s derivative interest rate swaps designated as cash flow hedges recorded in other comprehensive income during the six months ended March 31, 2022 were $ 28 million.

The following is a summary of amounts recorded in the consolidated balance sheets pertaining to the Company’s derivative instruments at March 31, 2022 and September 30, 2021:

2022 (a) September 30,

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______________________________________

(a) $ 5 million and $ 3 million of foreign exchange derivative contracts in current asset and liability positions, respectively, and $ 13 million of interest rate swaps in noncurrent liability positions.

(b) $ 22 million of interest rate swaps in noncurrent liability positions.

(a) Includes $ 12 million and $ 10 million of foreign exchange derivative contracts which net to $ 3 million of current assets and $ 1 million of current liabilities, and $ 8 million and $ 2 million of interest rate swaps in noncurrent asset and current liability positions, respectively.

(b) Includes $ 22 million of interest rate swaps in noncurrent liability positions.

Segment Information

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Three Months Ended (in millions)

December 31, 2021

March 31, 2022

Revenues $ 1,147 $ 230 $ ( 1 ) $ 1,376

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OIBDA 250 61 ( 56 ) 255

December 31, 2020

March 31, 2021

Revenues $ 1,059 $ 192 $ ( 1 ) $ 1,250

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OIBDA 235 43 ( 50 ) 228

Publishing Corporate

eliminations Total

Six Months Ended (in millions)

March 31, 2022

Revenues $ 2,533 $ 459 $ ( 2 ) $ 2,990

Operating income (loss) 465 70 ( 130 ) 405

Amortization of intangible assets 87 42 — 129

Depreciation of property, plant and equipment 28 3 10 41

OIBDA 580 115 ( 120 ) 575

March 31, 2021

Revenues $ 2,220 $ 367 $ ( 2 ) $ 2,585

Operating income (loss) 407 40 ( 100 ) 347

Amortization of intangible assets 71 39 — 110

Depreciation of property, plant and equipment 26 3 9 38

OIBDA 504 82 ( 91 ) 495

Additional Financial Information

Cash Interest and Taxes

The Company made interest payments of approximately $ 13 million and $ 27 million during the three month ended December 31, 2021 and 2020, respectively.

The Company paid approximately $ 29 million and $ 17 million of income and withholding taxes, net of refunds, for the three months ended December 31, 2021 and 2020, respectively.

The Company made interest payments of approximately $ 44 million and $ 37 million during the three months ended March 31, 2022 and 2021, respectively, and approximately $ 57 million and $ 64 million during the six months ended March 31, 2022 and 2021, respectively.

The Company paid approximately $ 37 million and $ 35 million of income and withholding taxes, net of refunds, for the three months ended March 31, 2022 and 2021, respectively, and approximately $ 66 million and $ 52 million of income and withholding taxes, net of refunds, for the six months ended March 31, 2022 and 2021, respectively.

The Company’s ability to pay dividends may be restricted by covenants in the credit agreement for the Revolving Credit Facility which are currently suspended but which will be reinstated if Acquisition Corp.’s Total Indebtedness to EBITDA Ratio increases above 3.50 :1.00 and the term loans do not achieve an investment grade rating.

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Therefore, there can be no assurance that the Company will pay any dividends to holders of the Company’s common stock, or as to the amount of any such dividends.

On November 9, 2021, the Company’s board of directors declared a cash dividend of $ 0.15 per share on the Company’s Class A Common Stock and Class B Common Stock, as well as related payments under certain stock-based compensation plans, which was paid to stockholders on December 1, 2021.

The Company paid an aggregate of approximately $ 78 million, or $ 0.15 per share, in cash dividends to stockholders and participating security holders for the three months ended December 31, 2021.

On February 8, 2022, the Company’s board of directors declared a cash dividend of $ 0.15 per share on the Company’s Class A Common Stock and Class B Common Stock, as well as related payments under certain stock-based compensation plans, payable on March 1, 2022 to stockholders of record as of the close of business on February 18, 2022.

The Company paid an aggregate of approximately $ 78 million and $ 156 million, or $ 0.15 and $ 0.30 per share, in cash dividends to stockholders and participating security holders for the three and six months ended March 31, 2022, respectively.

Noncash Investment Activity

Noncash investing activities for the three months ended December 31, 2021 was approximately $ 125 million related to the acquisition of music publishing rights and music catalogs, net during the three months ended December 31, 2021.

The corresponding notes payable balance is reflected as other current liabilities within the Company’s consolidated balance sheet at December 31, 2021.

Noncash investing activities for the three months ended March 31, 2022 was approximately $ 125 million related to the acquisition of music publishing rights and music catalogs, net during the six months ended March 31, 2022.

The corresponding notes payable balance is reflected as other current liabilities within the Company’s consolidated balance sheet at March 31, 2022.

COVID-19 Pandemic

On March 11, 2020, the COVID-19 outbreak was declared a global pandemic by the World Health Organization.

Government-imposed mandates limiting public assembly and restrictions on non-essential businesses have adversely impacted the Company’s operations for the three months ended December 31, 2021 and December 31, 2020, including touring and live events.

For the three months ended December 31, 2021, revenues improved due to the ongoing recovery of certain COVID-19 impacted revenue streams despite a rise in COVID-19 cases associated with the Omicron variant.

Government-imposed mandates limiting public assembly and restrictions on non-essential businesses have adversely impacted the Company’s operations for the three and six months ended March 31, 2022 and March 31, 2021, including touring and live events.

For the three and six months ended March 31, 2022, revenues improved due to the ongoing recovery of certain COVID-19 impacted revenue streams despite a rise in COVID-19 cases associated with the Omicron variant.

The continued impact of COVID-19, including increases in infection rates, new variants, renewed governmental action to slow the spread of COVID-19 and to what extent it will impact the Company’s music and related services cannot be predicted.

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In addition to defining fair value, ASC 820 expands the disclosure requirements around fair value and establishes a fair value hierarchy for valuation inputs.

The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market.

The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in

measuring fair value are observable in the market.

Each fair value measurement is reported in one of the three levels which is determined by the lowest level input that is significant to the fair value measurement in its entirety.

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The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models and similar techniques.

In accordance with the fair value hierarchy, described above, the following tables show the fair value of the Company’s financial instruments that are required to be measured at fair value as of December 31, 2021 and September 30, 2021.

Fair Value Measurements as of December 31, 2021

Fair Value Measurements as of March 31, 2022

(Level 1) (Level 2) (Level 3) Total

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Other Current Liabilities:

Contractual Obligations (b) — — ( 7 ) ( 7 )

Interest Rate Swap (e) — ( 2 ) — ( 2 )

Foreign Currency Forward Exchange Contracts (a) — ( 1 ) — ( 1 )

Other Noncurrent Assets:

Interest Rate Swap (e) — 8 — 8

Equity Investments with Readily Determinable Fair Value (d) 21 — — 21

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Contractual Obligations (b) — — ( 11 ) ( 11 )

Interest Rate Swaps (e) — ( 13 ) — ( 13 )

Total $ 21 $ 8 $ ( 11 ) $ 18

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(a) The fair value of foreign currency forward exchange contracts is based on dealer quotes of market forward rates and reflects the amount that the Company would receive or pay at their maturity dates for contracts involving the same currencies and maturity dates.

(b) This represents contingent consideration related to a fiscal 2020 acquisition.

(b) This represents contingent consideration related to acquisitions.

This is based on a probability weighted performance approach and it is adjusted to fair value on a recurring basis and any adjustments are typically included as a component of operating income in the consolidated statements of operations.

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(c) This represents an equity method investment which was acquired in fiscal 2019 whereby the Company elected the fair value option under ASC 825, Financial Instruments (“ASC 825”).

In November 2021, the investment was reclassified to an equity investment with a readily determinable fair value.

During the three months ended March 31, 2022, this investment was sold.

(d) These represent equity investments with a readily determinable fair value.

The Company has measured its investments to fair value in accordance with ASC 321, Investments—Equity Securities, based on quoted prices in active markets.

(e) The fair value of the interest rate swaps is based on dealer quotes of market forward rates and reflects the amount that the Company would receive or pay as of December 31, 2021 for contracts involving the same attributes and maturity dates.

(e) The fair value of the interest rate swaps is based on dealer quotes of market forward rates and reflects the amount that the Company would receive or pay as of March 31, 2022 for contracts involving the same attributes and maturity dates.

The following table reconciles the beginning and ending balances of net liabilities classified as Level 3:

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Additions ( 1 )

Balance at December 31, 2021 $ ( 17 )

Balance at March 31, 2022 $ ( 11 )

The majority of the Company’s non-financial instruments, which include goodwill, intangible assets, inventories and property, plant and equipment, are not required to be re-measured to fair value on a recurring basis.

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The Company has elected to use the measurement alternative to fair value that will allow these investments to be recorded at cost, less impairment, and adjusted for subsequent observable price changes.

The Company did not record any impairment charges on these investments during the three months ended December 31, 2021 and 2020.

In addition, there were no observable price changes events that were completed during the three months ended December 31, 2021 and 2020.

The Company did not record any impairment charges on these investments during the three and six months ended March 31, 2022 and 2021.

In addition, there were no observable price changes events that were completed during the three and six months ended March 31, 2022 and 2021.

Fair Value of Debt

Based on the level of interest rates prevailing at December 31, 2021, the fair value of the Company’s debt was $ 3.875 billion.

Based on the level of interest rates prevailing at March 31, 2022, the fair value of the Company’s debt was $ 3.652 billion.

Based on the level of interest rates prevailing at September 30, 2021, the fair value of the Company’s debt was $ 3.412 billion.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements